May 4 (Bloomberg) -- U.S. Treasury Secretary Timothy F.
Geithner said a proposed bank tax would target big financial
companies that use short-term funding to finance risky practices
such as derivatives and off-balance sheet trading.

“We designed the fee so that it would fall most heavily on
firms that fund riskier activities with less stable forms of
funding,” Geithner said today in prepared testimony to the
Senate Finance Committee.

The Obama administration has asked Congress to enact what
Geithner described as a “too big to fail tax” on financial
firms with more than $50 billion in assets to recoup the costs
of the Troubled Asset Relief Program. The fee would raise $90
billion over 10 years and would stay in place until the
government recovers all the costs of the bank rescue, Geithner
said.

The levy would be based on a formula to measure assets,
liabilities and risk. Firms engaging in riskier trading would
pay more than “more conservatively” managed firms, and 99
percent of U.S. banks would be excluded from the fee, he said.

Senator Orrin Hatch, a Utah Republican, questioned whether
the fee would discourage large banks from expanding or adding
services in order to minimize payments to the government.
Hatch’s state is home to Zions Bancorporation, which has $51.7
billion in assets and is this year’s best-performing stock in
the Standard & Poor’s 500 Index, up 126 percent through
yesterday’s close.

Consumer Lending

Geithner responded that the fee could be set up in a way
that doesn’t hurt consumer-oriented banking.

“For banks that take deposits to fund loans to their
business customers, they would not be bearing any material fee
as part of the way we designed this,” he said.

The Obama administration proposed the tax sooner than the
law required to send a signal that the U.S. is trying to restore
its budget deficit to “sustainable” levels, Geithner said. The
administration has projected a $1.6 trillion budget deficit in
fiscal year 2010, which began Oct. 1.

“Delay is neither necessary nor desirable at a time when
people are worried about our political capacity as a country to
help dig our way out of the fiscal damage caused by this
crisis,” Geithner said.

Financial industry representatives told the panel that the
proposal doesn’t live up to the government’s legal requirement
to recoup TARP costs or consider the economic impact of more
financial regulation.

Industry Opposition

“We question why the financial industry should be asked to
pay for TARP losses attributable to other industries,” Steve
Bartlett, president of the Financial Services Roundtable, said
in prepared testimony.

Geithner said banks and other financial firms benefitted
from the stability that TARP and other rescue efforts provided
and therefore should bear the burden of repaying the government.
He said the Obama administration opted not to subject auto
companies General Motors Co. and Chrysler Group LLC to the tax
because of the restructuring the automakers went through as a
condition of receiving aid.

“Since they went through bankruptcy and restructuring, we
didn’t think it was necessarily appropriate for them to bear, to
be covered by a fee, that as you’ve seen is designed to help us
make sure that we’re reducing risk in the financial system,”
Geithner said.

Auto Companies

Geithner said the government will work “very hard” to
recover the assistance to the auto companies. He also said
Federal Reserve efforts to support the banking industry through
the crisis have the potential to return “tens of billions of
dollars” in profits.

The U.S. has endorsed an effort by the Group of 20 nations
to have banks shoulder financial rescue costs after governments
and central banks provided an estimated $11 trillion to
institutions including Citigroup Inc., Royal Bank of Scotland
Plc and American International Group Inc.

In meetings last month, Geithner sought to bridge the gap
between European proposals to tap banks for revenue and Canadian
opposition to a fee on banks that didn’t need help during the
crisis.

In today’s testimony, Geithner said the U.S. would continue
its efforts to forge an international consensus.

“We want to design the fee in a way that improves the
chances that other governments will adopt similar measures,”
Geithner said. He said the Obama administration also would work
with Congress to find the best approach for the U.S. financial
system.